What is Efficiency?

What is Efficiency

Efficiency is the ability to avoid wasting materials, energy, efforts, money, and time in doing something or in producing a desired result. In a more general sense, it is the ability to do things well, successfully, and without waste. “Efficiency is thus not a goal in itself.

Efficiency signifies a peak level of performance that uses the least amount of inputs to achieve the highest amount of output. Efficiency requires reducing the number of unnecessary resources used to produce a given output including personal time and energy. It is a measurable concept that can be determined using the ratio of useful output to total input. It minimizes the waste of resources such as physical materials, energy, and time while accomplishing the desired output.


Understanding Efficiency

In general something is efficient if nothing is wasted and all processes are optimized. In finance and economics, efficiency can be used in a variety of ways to describe various optimization processes.

Economic efficiency 

refers to the optimization of resources to best serve each person in that economic state. No set threshold determines the effectiveness of an economy, but indicators of economic efficiency include goods brought to market at the lowest possible cost and labor that provides the greatest possible output.

Market efficiency 

describes how well prices integrate available information. Markets are thus said to be efficient when all information is already incorporated into prices, and so there is no way to “beat” the market since there are no undervalued or overvalued securities available. Market efficiency was described in 1970 by economist Eugene Fama, whose efficient market hypothesis (EMH) states that an investor can’t outperform the market, and that market anomalies should not exist because they will immediately be arbitraged away.

Operational efficiency 

measures how well profits are earned as a function of operating costs. The greater the operational efficiency, the more profitable a firm or investment is. This is because the entity is able to generate greater income or returns for the same or lower cost than an alternative. In financial markets, operational efficiency occurs when transaction costs and fees are reduced.